Posted by Ehsani on Monday, September 26th, 2011
Syria Faces A New Economic Reality
By Ehsani for Syria Comment
Sept 26, 2011
The recently announced import suspension prohibits the import of all products that have a customs duty of over 5 percent. This notice also covers countries that Syria signed a free trade agreement with (Turkey, Ukraine and the Arab countries for example). The original signed free trade agreements will no longer be fully adhered to.
As expected, the Ministry did issue a list of products which received an exemption from the ruling. There are 51 items on this list. The first 17 are of the food products variety like meat, fish, cashew nuts, almonds and bananas. Some of the details on the list are mind-bogglingly trivial. The type of fish that was exempted from the ban for example was sword fish which made it to item number 5. Fish (with teeth) from the south pole or Australia also made it to the exemption list at number 6. But the sword fish were dropped again in item 7 which allowed all fish other than sword fish or those from the south pole and Australia.
The rest of the items are mostly medical in nature. Examples include x-ray machines, various Lab equipments, Dental chairs, and prescription and sun glasses. The only vehicles allowed are buses for the local public transportation companies, fire and ambulance trucks as well as fork lifts. Mobile phones (current customs duty of 10%) were also exempt from the ruling. This suspension is effective for all imports after September 22, 2011 (those who used a local bank prior to this date are exempt). Overall, the complexity of this ruling can only be appreciated when one delves into even more detail of what is banned and what is not.
The General Reaction to the Ruling:
The deputy Minister of the Economy and Trade was in Aleppo today. He was in a packed room of businessmen at the city’s Chamber of Commerce. Several passionate pleas were made to rethink the decision and to exempt more products. Many explained how they already have goods on the way and wondered what they would with them (they did not have an L/C open before September 22nd). One wondered why cashew nuts were exempted when the U.S. used to be the largest supplier of this product (Vietnam and India are now the world’s largest exporters). To every question, the deputy Minister’s response was to ask that they do so in writing and when the Ministry receives their written questions, it will study them in detail and see how they can help. To which one food importer responded that it would be too late as his goods are already at the border and by the time his letter reaches Damascus and be read he would have already thrown away his rotting produce.
One can read more about these shock waves hitting the Syrian business community. In the meantime, government has tried its best to argue that the decision has both pluses and minuses. On the minus side, the government is aware that prices of the recently banned items will rise rather significantly. Indeed, reports of price hikes close to 40 percent have already been reported on few electronic items while companies like Sony, Sharp and others have suspended their sales in the country altogether. While the government did not mention it, the other minus will stem from the fact that the grey market will now flourish as illicit trade fills the inevitable void that will develop. On the plus side, the Minister of the economy and trade has tried to argue that this decision will help local producers and employment. The argument appears logical at first. However, by referring to the measures as “temporary”, one fails to see how local producers will add to expensive capacity and hire new employees knowing that the decision can be reversed anytime. Local manufacturers are unlikely to invest in new machinery and equipment in this atmosphere. As it is, a number of industrialists have put expansion or new projects on hold over the last few years as the government has proved incapable of delivering sufficient electricity capacity.
Syria’s external Accounts undermined by its fixed exchange rate
This article argues that while the decision to suspend imports for these products appears to have been caused by the recent sanctions imposed by the US and EU, Syria’s external accounts were already being undercut by the fixed exchange rate policy that had encouraged imports and discouraged exports for years. In the end, the authorities have found it expensive and difficult to finance the insatiable demand for foreign made products at the rate of SYP 47 to the dollar while revenues from oil production and exports fell steadily.
The 2012 Syrian Budget Rises by 59%
In addition to the pressure stemming from an imbalance in its foreign trade position, the other main problem in the economy comes from the government budgeting situation. Just yesterday, the state increased its expenditures by 59 percent when it announced its new budget for 2012. The Social subsidies alone will amount to 29% percent (US$ 7.72) of all government expenditures . This means that one third out of every Dollar that the government spends will go to supporting a hugely expensive subsidy program that has spiraled out of control thanks to the country’s demographics and illicit trading (especially in mazot – fuel oil). How large is the budget and total government expenditures this year? The number is $US 26.5 billion or 50 per cent of total nominal GDP. This is an astoundingly high number.
Failure to Tax
The US$9.8 billion jump in expenditures this year needs to be funded by increased tax collection in a business environment that will be extremely challenging. One of the examples of an obvious and gaping hole in the government’s ability to collect taxes comes from custom duties on imports. While the government imposes duties close to 50% on many products, the 2009 government revenue from this area indicates that the treasury was only able to collect US$ 0.56 billion or 4.3% of the total value of goods imported. Following the recent sanctions on Syrian crude exports, it seems that the country was able to export around 110,000 barrels per day. Revenues from such exports used to be in the range of $3.0 billion. Given the recent sanctions and even when alternative buyers are found, it is expected that this can only take place after a hair cut is offered on the globally traded price. This is likely to further erode the government’s ability to earn much needed foreign exchange. It is possible that the difficulties of finding buyers will be such that talk of barter trades will soon be discussed. Iran already does this with its own crude exports. Indeed, this morning the Financial Times claims that Syria is unable to find any buyers for its oil (See Story below).
The pros and cons of a stable exchange rate:
Since the last currency crisis in the mid-1980, Syria has defined both political and economic success by the stability of its foreign exchange regime. The central bank used the stability of its foreign exchange as the main metric of successful economic management. This metric did not include economic growth, employment level or the balance of payments as targets. Stable exchange rate led to inflation stability and this is all that mattered to the economic planners.
In a flexible exchange regime, a loss of competitiveness or a widening trade imbalance usually results in a weaker currency which acts as self-correcting valve that restores the initial imbalances over time. Artificially fixed exchange rates deprive an economy from such a correcting mechanism. This is what happened in Syria. While this policy seemingly held imported inflation in check, it was causing significant damage to external accounts. As the country adopted the new social market economy and import restrictions were lifted, an import orgy was now underway. This was augmented by free trade agreements with the Arab world and later with Turkey. Local producers who lived for decades under the comfortable protection of “himaye wataniye” were now under assault from a global market place that was more efficient and competitive than them. It did not take long for Syrians to dump their manufacturing hats and transform themselves into importers. Throughout this worsening export/import imbalance, the currency value did not budge. The Central Bank intervened at any sign of SYP weakness.
For Syria to continue to finance importers at the rate of SYP 47 to $1 dollar, it needed matching foreign currency receipts from its exports, remittances or tourism. The hopes were high when it came to the latter two. Thanks to a steady fall in oil production and exports however, the country’s ability to accumulate serious foreign currency was becoming harder to accomplish. In spite of such trends, the foreign exchange regime was never modified to weaken the SYP to help make imports more expensive and/or to give local producers a much needed slight competitive advantage.
Proponents of the stable fixed Exchange rate regime pointed to stable inflation as the primary objective and how allowing the SYP to devalue will harm the economy. In reality, however, what transpired is that the government exhausted its ability to finance the country’s increasing appetite to import. Much has been discussed of the fact that the Central Bank sits on a comfortable foreign exchange reserve position of nearly US$ 18 billion. In reality, this number is impossible to verify. The official government data and accounting is simply not transparent enough to confirm such claims. More transparency is highly desirable in an effort to reduce speculation and rely on factual data during such a critical period. In the meantime, the only thing certain is that the government has decided to conserve on whatever foreign reserves it has at its disposal to prepare for an extremely challenging economic times in the period ahead.
News Round Up
Ban forces Syria to cut oil production – Financial Times
Syria has told foreign oil companies to cut production due to a backlog of crude that has filled its storage capacity because the government has been so far unable to bypass an embargo on crude oil exports imposed by the European Union.
Syria has sought to sell its oil to nations outside the EU, which before the ban imported around 95 per cent of the country’s output.
But industry executives and oil traders said the country had been so far unable to attract new
buyers in spite of offering discounts.
The failure has forced foreign oil companies to pump crude originally earmarked for export into storage. “There is a backlog of crude in the country,” said an industry executive.
“Storage is filling up,” the executive added, saying that some companies had been told to reduce output.
Gulfsands Petroleum, the London-listed company which operates in Syria, has cut its production by around 40 per cent at the request of the authorities. The company is now pumping about 14,500 barrels a day, down from about than 24,000 b/d in August.
Industry executives said other international oil companies operating in the country, which include Royal Dutch Shell, Total of France, and state-owned CNPC of China and ONGC of India, have also recently received orders to cut back.
Although international oil companies hope the cuts are temporary, and will end when Syria finds nations willing to take its crude, others see the drop lasting as long as the EU embargo remains.
Brussels imposed the oil ban in response to a crackdown by the regime of Bashar al-Assad on pro-democracy activists that
has seen more than 2,700 people die in the past six months.
Syria produced in August around 370,000 b/d of low quality crude oil, according to the International Energy Agency, the western countries’ oil watchdog.
The country exported around 150,000 b/d, with the rest consumed domestically. Germany and Italy accounted for roughly two-thirds of Syria’s oil exports last year.
Imad Moustapha, Syria’s ambassador to Washington, said in a recent interview with the Financial Times that the country would have no problem finding markets for its oil.
“It’s not that we are approaching people, it’s the other way around. We
are being approached,” he said.
But so far this month not a single cargo of Syrian crude oil has left the nation’s main export oil ports, according to shipping data. Several tenders of low quality, high sulphur Souedie crude, the country’s main export stream, have failed to attract any interest, traders said.
Oil traders said the impact of the EU ban on Syrian oil was wider than previously expected as international banks refused to open letters of credits – a common instrument used in trading – with Syrian entities, even when to destinations outside the EU. Tanker-owners were also reluctant to send their vessels to Syrian ports, they said.
The production losses compound the tight supply and demand balance in the Mediterranean and European region, home of four of the world’s 10 largest oil importing countries: Germany, France, Spain and Italy.
But the shortfall is not nearly as big as that created by the civil war in Libya, which produced before the start of the revolution 1.6m b/d of high quality, low sulphur crude oil.
Shell directed questions about production in Syria to the Damascus-based Al-Furat Petroleum Company, which could not be reached. Al-Furat is a joint venture between Syria’s state-owned General Petroleum Corporation, which controls a 50 per cent stake, Shell Oil and CNPC. Total did not responded to calls and e-mails.
Also from the FT, Syrian to look east for oil markets
Imad Moustapha, Damascus’s envoy in Washington, says the country will be able to offset the impact of western sanctions by looking east.
Mr Moustapha would not elaborate on which companies or countries had contacted his government but Syria’s bravado underlines the difficulty that western nations have in trying to inflict economic pain on President Bashar al-Assad’s regime in a bid to make it stop its violent crackdown on six months of pro-democracy protests.
“It’s not that we are approaching people, it’s the other way around. We are being approached,” Mr Moustapha told the Financial Times. “But no contracts have been signed yet.”
The US has imposed repeated rounds of sanctions on the Syrian regime since the unrest began in March, most recently banning any US investment in Syria’s crucial energy sector and prohibiting US companies from buying Syrian oil.
The sanctions were mainly symbolic as the US has minimal involvement in Syria’s energy sector. But the European Union, which buys more than 90 per cent of Syria’s crude oil exports, followed suit with an oil embargo of its own.
The 27-member bloc, however, said members had until mid-November to stop importing oil, a grace period during which Syria could line up other buyers for its oil, thereby possibly limiting the immediate impact.
Mr Moustapha brushed off the American sanctions, saying the US had been taking such actions since the 1950s. But the European sanctions were a different story.
“Of course they are going to have a negative effect. They create a challenge for us to find a way to develop our economy and we are not denying that it will be a challenge,” he said.
Syria would be forced to shift its economic gaze eastward, Mr Moustapha said, just as Iran increasingly looked to China after chilling sanctions on its energy and financial sectors.
“We will re-orient our economy towards Asia, Africa and South America. We have a whole spectrum of options open to us,” he said.
Syria exports a heavy, sour crude oil called Souedie, chiefly to refiners in Germany, Italy, France and the Netherlands. Although it would be expensive to transport it beyond the Mediterranean Sea, both China and India have the technical capacity to refine this type of oil.
Ayham Kamel, a Middle East analyst at the Eurasia Group in Washington, said he would not be surprised if customers had been knocking on Syria’s door, looking to take advantage of the political situation to get a cheap de
Along with a picture of Syrian president, Bashar al-Assad, the hacked home page showed a message saying the “Syrian Electronic Army Were Here”.
A further message made terror threats against the United States and criticised its opposition to the Assad regime.
Harvard said this has been the work of a “sophisticated individual or group”.
“The university’s homepage was compromised by an outside party this morning. We took down the site for several hours in order to restore it. The attack appears to have been the work of a sophisticated individual or group,” said a Harvard spokesman.
The website was hacked on Monday morning by what appeared to be sympathisers of President Assad of Syria, with a picture of the president in military uniform appearing in front of a Syrian flag.
This was linked to another image of Syrian national colours, with a message accusing the United States of involvement in the uprisings against President Assad.
The Sarkozy story from the previous thread has elicited many responses questioning the accuracy of the report and why the story was published without investigating further into the claim. It is indeed the case that SC did not do more than link to the story as it appeared in Al Diyar. Another reader asked the source of the information behind Hotbird’s decision to stop carrying addunia. It was here.